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India's International Reserves: How Large and How Diversified?

Listed author(s):
  • Rajan Ramkishen S


    (George Mason University and Institute of South East Asian Studies)

  • Gopalan Sasidaran


    (George Mason University)

Asymmetric foreign exchange intervention by the Reserve Bank of India (RBI) has resulted in a sustained accretion of Indias foreign exchange reserves. The reserve buildup in India has certainly been impressive, rising from around US$5-6 million in 1991, to nearly US$300 billion in mid 2008. In addition to addressing the issues of reserve adequacy, this paper examines the forms the reserves have taken (asset and currency composition), and the extent to which Indias reserve holdings are diversified.The issue of reserve adequacy was made apparent during the 1990s and early 2000 when rapid reserve depletion became a defining and determining feature of the series of currency crises that hit emerging economies. In order to assess the adequacy of Indias stock of international reserves, the paper considers a few standard measures used in literature and finds that Indias reserve stock is more than adequate, placing them in a much better position than many other emerging economies.The paper goes on to examine the asset and currency composition of such reserves. More than 50 percent of Indias reserve holdings have been in the form of foreign currencies and deposits as cash, followed by investments in foreign securities and gold deposits, in that order, reflecting a high degree of risk aversion by the RBI in the management of the reserves.While data on asset composition are available, the currency composition of reserves is a well-guarded secret. Hence the paper undertakes some simulation exercises to arrive at some reasonable guesstimates of such a composition. The paper also makes use of the Treasury International Capital Reporting System (TIC) data to track Indias investments in the U.S. securities, thereby assessing the weight of U.S. dollar assets in Indias reserve holdings.

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Article provided by De Gruyter in its journal Global Economy Journal.

Volume (Year): 10 (2010)
Issue (Month): 3 (October)
Pages: 1-18

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Handle: RePEc:bpj:glecon:v:10:y:2010:i:3:n:6
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  1. Ramachandran, M. & Srinivasan, Naveen, 2007. "Asymmetric exchange rate intervention and international reserve accumulation in India," Economics Letters, Elsevier, vol. 94(2), pages 259-265, February.
  2. Graham Bird & Ramkishen Rajan, 2003. "Too Much of a Good Thing? The Adequacy of International Reserves in the Aftermath of Crises," The World Economy, Wiley Blackwell, vol. 26(6), pages 873-891, June.
  3. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies; How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund.
  4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  5. Rajan, Ramkishen, 2009. "Monetary, Investment, and Trade Issues in India," OUP Catalogue, Oxford University Press, number 9780195699951.
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